Exclusive: Funds could face market curbs after lobbying backfires

LONDON (Reuters) - Fund managers may face tougher scrutiny by global regulators than planned after their intense lobbying against a first proposal backfired, industry sources and G20 officials said.

A global G20 task force is rethinking its initial approach which involved targeting the biggest funds, and could opt for a more intrusive method that would affect more funds by limiting their market activities during periods of turbulence, the sources told Reuters.

The plans are part of an international effort to prevent financial crises.

“The industry fears it may have shot itself in the foot as FSB (the regulatory task force) is coming back with an even more radical proposal,” a European asset management industry source said.

“Since we argued that size is the wrong metric to use, the FSB is now looking at investment-driven supervisory tools.”

The group of 20 economies (G20) in 2009 asked its regulatory task force, the Financial Stability Board (FSB), to scrutinize big asset managers more closely as part of its remit to maintain financial stability. Until then, the focus had been on banks.

World leaders wanted supervision of all parts of the financial system reviewed after the 2007-09 financial crisis resulted in taxpayers having to bail out many banks, at a cost of trillions of dollars.

The FSB proposed in January that individual funds with over $100 billion in assets should face tougher, yet-to-be-detailed scrutiny. This threshold captures 14 funds, all in the United States.

The industry responded by saying the FSB proposals which focused solely on the size of funds were too simplistic. It questioned why fund managers were being targeted since, it argued, they were not responsible for the crisis.

Details of the new proposals are still sketchy, but fund management industry sources, who declined to be identified because of the sensitivity of the plans, said the tools being considered include directly clamping down on a fund’s market activities in times of a crisis to ensure stability.

This could include curbs on inflows and outflows of a particular asset class like a government bond, perhaps through having to impose “gates” or redemption fees to avoid runs.

Gates refer to temporary suspensions on taking money out of a fund, while redemption fees refer to a fee to discourage withdrawals in choppy markets.

Greg Medcraft, chairman of the International Organisation of Securities Commissions (IOSCO), a global markets watchdog and FSB member, said a “hybrid” approach looking at the fund itself as well as market disruption risks, was a better way to look at the sector.

“But it has to be tailored. First of all you have to be clear why there is systemic risk from funds and to unpick it before talking about how to deal with funds,” Medcraft told Reuters on Wednesday.

He declined to comment on any specific measures, saying it was too early even though some industry officials already worry about the impact of potential curbs like gates.

“This would undermine fund managers as professional investors and lock pensioners and savers into losses,” the European funds official added.

Such intervention is already part of supervisory thinking on money market funds in the United States and Europe.

The Investment Company Institute (ICI), a U.S. funds sector lobby group, said in a 92-page letter to the FSB in April that it was “deeply troubled” by the logic of the original plans that dramatically expand the authority of bank supervisors.

A G20 source said the global funds sector had overreacted to the FSB’s initial proposals and that a rethink was underway.

“The threshold was simply a threshold and just the beginning of a process of gathering more information. Market activity is clearly an area that is being looked at,” the G20 source added.

ICI had no immediate comment.

The FSB declined to comment ahead of a G20 summit in Brisbane, Australia in November when the revamped plans will be discussed and later put out to public consultation.

Some fund managers welcome the FSB’s switch in emphasis from examining if big funds are well capitalized to looking at the markets they use, but fear that sweeping market intervention powers would be a step too far if not carefully used.

“Market-based approaches may potentially be a good way forward, depending on what exactly the term means, especially in terms of outcomes for the very investors one is trying to protect,” said Arjun Singh-Muchelle, a senior advisor at Britain’s Investment Management Association.

“The first step, in any case, would still appear to be to craft a coherent international approach to information for supervisors, helping G20 authorities get a full picture of risk in the system,” Singh-Muchelle said.

Other industry officials played down the likelihood of draconian market curbs, saying their effectiveness has been challenged in research from the Federal Reserve.

Industry officials said the revised approach is raising some concern among markets regulators, partly because it would mark further encroachment by central bankers on securities turf.